Public, Private, and Permissioned Blockchains: Benefits and Solutions for Businesses

In 2019, blockchain technology is increasingly discussed in terms of its industrial use — blockchains can help digitize assets, secure transactions, and make data sharing more efficient. The case of IBM and Maersk, which have launched the TradeLense blockchain platform to build a global logistics network, attests to the efficiency of the technology in transforming business processes on a global scale. Russia keeps pace with the rapidly developing blockchain industry — S7 Airlines, Gazpromneft-Aero, and Alfa-Bank already use a system of mutual settlements for aviation fuel.

In this article, we will explore:

• The existing types of blockchain;
• Their hybrid versions;
• What types of blockchain networks are the best fit to address business challenges and optimize processes.

Blockchain networks come in three versions: public, private, and permissioned, along with their own pluses and minuses.

Public (Open) Blockchains

Fully open and transparent, public networks accept any user as their member. The examples of public blockchains include Bitcoin, Ethereum, Waves, and Ripple, among others.

Key features of open networks:

• Decentralization: The network is governed by all its members, who enjoy equal rights. The computer of each participant stores all the information.
• Transparency: All members have open access to the data on the transactions executed, agreements, or money transfers.
• Equity: An open blockchain is akin to the internet, with all members having access to the information stored there and participating in the consensus-building — in other words, deciding which blocks will become part of the chain. The community of participants, who act on an equal footing and enjoy equal status, manage the network. Everyone plays a role — miners, developers, ordinary users, and service providers.

We are used to equate blockchain technology and security, and public blockchains fully meet those expectations. The information is stored by numerous users on independent servers around the world and encrypted. Proof-of-Work and Proof-of-Stake, the two most popular consensus algorithms, validate the work performed in the system. All these factors contribute to the security of public blockchains.

The users of public networks can make smart contracts and perform asset transactions without engaging with a middleman, say a bank. These transactions are fully transparent and can be easily tracked and verified, for every participant of an open network has access to the information. They are written into the lines of code and contain the entire set of terms and conditions, detailing commitments and penalties for breaches. Smart contracts ensure automatic performance of all terms and conditions.

Among the core advantages of public blockchains are:

— Distributed data and strong decentralization;

— Full transparency;

— Data protected from modification;

— Peer-to-peer relations between members.

There are also drawbacks, though. An open blockchain is rarely suitable for addressing business challenges, and here is why. For instance, a high processing speed is a prerequisite for exchanging large amounts of data, and a public blockchain is not always capable of ensuring such speed. Besides, many companies protect their trade secrets and only share information with reliable partners and contractors. At the legislative level, companies also face certain limitations — consider, for instance, the recent EU GDPR legislation or the Russian Federal Law on Personal Data №152-FZ.

Open blockchains are also vulnerable to the 51% attack. This type of attacks happens when the attacker controls more than 50% of the network’s computing power, or hashrate. Attackers obtain control over the network and all its transactions and can generate blocks as they please.

Private Blockchains

The members of a private blockchain network make certain arrangements as to the levels of access to the information, rules for making new entries or verifying data. To know more about the structure and restrictions of private blockchains, check out our article.

The major advantages of private blockchains include:

— A possibility to create a network optimizing a certain business process, taking into consideration the needs of the company, its partners and contractors;

— Fast execution of smart contracts.

Private blockchains also allow their members to enter into smart contracts. Here smart contracts add transparency to transactions and improve their speed, not to mention reduce paperwork. They can be used in any sector of the economy.

As an example, we have recently developed a blockchain platform for the Mirrico Group of Companies operating in the oil and gas industry. The Sensef platform allows Mirrico to perform mutual settlements that depend on the efficiency of the work done and on the amount of goods delivered. The blockchain solution allows to not only monitor the contract execution but also generate work completion certificates for contractors.

Yet another blockchain solution developed for an oil and gas major operates on a smart contract, verifies data using IoT (Internet of Things) and is designed to optimize the supply of petroleum products.

However appealing, private blockchains have their own issues:

— The risk of centralization;

— Information opacity, with all data stored inside the system and accessible only to network members (this will be an undeniable benefit for protecting commercial secrets, though);

— A limited number of members, who need to be KYC compliant. This comes with a risk of “factions” forming inside the network and acting in their own interests.

Permissioned Blockchains

A permissioned blockchain is a public network that can only be accessed subject to certain policies and restrictions. Only a select number of participants can make changes to the register, assign levels of access, or accept new members into the network.

A clear example of a permissioned blockchain is Masterchain, a Russian Ethereum powered blockchain network. Designed to exchange and store financial information, the network allows to carry out online transactions, promptly verify data, or create new financial services.

Such largest banks as the Central Bank of the Russian Federation, Sberbank, Alfa-Bank, Otkritie FC Bank, Tinkoff Bank together with QIWI Group contributed to platform development. Masterchain is essentially a common space which can host various cases of financial transactions.

Same as a private blockchain, a permissioned blockchain network is meant to address specific needs of its participants. Those networks are open and may also be public — which may come in handy in some cases. However, all transactions are performed through dedicated nodes that participate in the consensus mechanism.

Permissioned blockchains are also affected by such issues as proneness to centralization and the emergence of “factions” inside the network.

Hybrid Solutions

In an effort to minimize risk and take the best from every type of blockchains, developers come up with hybrid solutions, leveraging both private and public networks.

One possible option for using public networks in business is anchoring, or writing the hash of the entire system in a public blockchain. This allows to verify data integrity and detect malicious manipulations. Here is how anchoring works: a copy of the system is uploaded to an open network. The hash uploaded to the public blockchain can then be compared to the information stored in the company’s database, to make sure the data was not altered.

As a similar example of such a solution, take Exonum, a blockchain powered system for managing land ownership. To protect the data from fraud the system hash is regularly written into the Bitcoin blockchain.

Another solution based on private, public, and permissioned networks is the so-called hybrid networks, or hybrid blockchains.

Polkadot is a hybrid blockchain. By connecting disparate blockchains, Polkadot creates a single multichain. The project is a Web3 initiative launched by Swiss-based Web3 Foundation. The global objective of Web3 is to create the internet of blockchains. We will get back to Polkadot in our future article, so stay tuned!

The Future Scope of Blockchain Technology

Any of the blockchain types is to some degree suited to commercial use. One should start with figuring out what kind of tasks the network is supposed to solve, and then choose a blockchain that suits their needs.

According to the 2019 study of the blockchain industry conducted by McKinsey, blockchain technology is still in its infancy, though it has won some interest on the part of innovative companies.

In 2017–2018, the market of blockchain solutions was the focus of attention of many investors. The CoinSchedule portal has calculated that in 2018, the technology attracted $21.4 billion from giant corporations, venture companies, and private investors.

In 2019, blockchain solutions are increasingly employed in retail, finance, healthcare, real estate, power industry, transportation, and other sectors of the economy oriented towards modernization.

Blockchains become a tool to develop various digital technologies, streamline business processes, and build partnerships based on trust. Blockchain technology still has a long way to go from occasional application to at-scale use cases. In our future articles, we will continue exploring blockchain use cases in various industries and make sure the technology is able to optimize intrinsically complex, multi-tiered business processes.

Stay tuned!